Money & Markets: Economy and earnings share spotlight

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Bay Street was poised to start the holiday-shortened week on a down note this morning following weakness Monday in major U.S. equity indexes which futures markets indicate will open lower as well today.

The Canadian dollar, however, was trading slightly higher amid mixed commodity prices after falling more than a third of a cent Friday to 96.2 cents US, which left it down more than a full cent over the week.

Meanwhile equity markets in Europe and Asia were mixed despite reports of increases in industrial production in Germany and Britain, a cut in interest rates to an all-time low by Australia’s central bank, and a smaller than expected decline in Italy’s recession-plagued economy.

“European markets are seesawing between modest gains and losses this morning while equities in Asia began the Tuesday session on a weaker footing but strengthened throughout the day,” notes BMO economist Carl Campus.

Here, the holiday-shortened week is loaded with key domestic economic reports, which will compete with further quarterly corporate earnings results, including insurance giants Sun Life Financial on Wednesday and Manulife Financial on Thursday, for the attention of investors, though that may not be good news for equity markets.

Analysts generally expect that the economic reports will show Canada’s trade deficit has widened, home construction plans and starts have weakened, new home prices are flat and, most importantly that job growth remains lacklustre.

Projections for Friday’s July employment report range from increases of a miserly 6,000 to a modest 17,500, which BMO expects, but which it notes would still be “slightly below the average gain over the past year.”

“Job growth totalled a meagre 81,400 – or 0.9 per cent annualized – through the first half of the year, the worst performance since the recession, consistent with lacklustre growth,” notes BMO economist Doug Porter.

“See-sawing jobs numbers have made calling the Labour Force Survey results a challenge,” adds CIBC economist Emanuella Enenajor. “But smoothing out the volatility, employment growth has averaged 14,000 in the last six months — nothing to write home about.”

And it’s not expected to get better soon.

“The jobs market is likely to remain subdued until next year, when overall economic growth is expected to be boosted by a firming U.S. economy,” says Benjamin Reitzes, another economist at BMO.

The overall sluggish economy will also likely be reflected in today’s June international trade report with RBC projecting the deficit will rise to $900 million from May’s $300 million, reflecting the combination of falling exports and rising imports.

“The June trade report will be monitored closely for indications of an impact from the Alberta flooding,” says RBC economist Paul Ferley, adding, however, that disruptions to rail and truck transportation in the province likely dampened both exports and imports.

BMO, meanwhile, expects the U.S. June trade deficit, which will also be released today but which unlike Canada’s monthly report includes services, eased, though to a still massive US$43 billion while the quarterly shortfall widened modestly to a “manageable” 2.8 per cent of GDP.

However, CIBC economist Andrew Grantham projects that some of the decline in the deficit will come from “import prices falling marginally faster than those of exports,” though “we also expect some improvement in real exports.”

Outside North America, the major economic report still to come this week is China’s July inflation data on Thursday. It could rattle global markets if there is a pickup from June’s 2.7 per cent annual rate by raising fears that the government might impose anti-inflation measures that would dampen growth.

On Monday, while Canadian markets were closed for the Civic Holiday, U.S. markets retreated from the record highs reached last week after news of stronger than expected growth in the services industry and a warning by a Fed official that investors should not depend on the US$85 billion a month in stimulus it has been injecting into that economy.

The Dow fell 46.23 points to 1,612.13 while the S&P 500 slipped 2.3 to 1,707.14,although the Nasdaq edged up 3.36 to 3,692.9

Looking back to Friday, while U.S. markets were hitting all-time highs, Canada’s S&P/TSX edged up 9.29 points to 12,603.2 but failed to make up the ground lost earlier in the week after news of weaker than expected domestic economic growth in May and the breakup of the Russian Potash cartel which led to a plunge in Potash Canada Corp. shares.

The “restructuring of the global potash market could have notable impact on Canada’s producers, and the Saskatchewan economy in particular,” TD Bank notes in an analysis of the potential impact of the change in the global potash market.

As BMO economist Doug Porter noted: “While U.S. stocks were hitting record highs this week, the TSX was almost stuck in the starting blocks, still struggling to stay in positive territory for 2013.

“The one market where Canada followed the U.S. lead was bonds — not necessarily a good thing,” Porter added, noting that yields here hit a two-year high earlier in the week.

Money & Markets has been shifted to a weekly format through the hazy days of late summer. A daily version will return in autumn.